A 401(k) isn’t the only path to a secure retirement. While these employer-sponsored plans are a popular way to save, they may not cover all your future income needs. Whether you’re self-employed and don’t have access to a 401(k) or are looking to diversify your strategy, retirement savings options like traditional IRAs, Roth IRAs and annuities can offer flexible ways to grow your nest egg and help create greater financial security for retirement.
Around 56 million workers across the U.S. do not have access to a 401(k) or a similar employer-sponsored retirement plan. A 401(k) is an effective, convenient way to save for retirement. Money is automatically withheld from your paycheck using pre-tax dollars, and you can contribute up to a set limit each year — plus an additional “catch-up” amount if you’re age 50 or older.
You’ll pay income taxes on contributions and earnings when you withdraw funds. If you access your money before age 59½ you may also pay a 10 percent penalty tax, and keep in mind, the money in your 401(k) is exposed to market volatility.
About 85 percent of employers who have a standard 401(k) plan offer a matching program. A typical employer match is 50 percent of the employee contribution, up to 6 percent of your salary. So if you have a 401(k), an important retirement-saving priority is to max out your employer match — it’s free money!
But the 401(k) isn’t the only game in town. If you want to put aside more than the amount your employer will match, don’t have access to a 401(k), or want to help ensure a guaranteed lifetime income, here are three other retirement savings options to consider:
People can contribute up to $7,000 each year to an Individual Retirement Account — $8,000 if you’re 50 or older. If you don’t have a 401(k) or similar retirement account at work, you can deduct your full IRA contribution from your taxes. Married couples can each have their own IRA and can each take advantage of the full combined contribution tax-deferred.
As with a 401(k), you’ll pay taxes on contributions and earnings when you withdraw funds. And if you withdraw funds before age 59½, you may pay an additional 10 percent penalty, also like a 401(k). Changes made by the SECURE Act 2.0 allow anyone who turned 70 on July 1, 2019, to delay taking their required minimum distributions (RMDs) until age 73.
Roth IRAs have the same contribution limits as traditional IRAs. You can’t deduct Roth IRA contributions from your current taxes, but you can withdraw both contributions and interest earnings tax-free after age 59½ if the account is at least five years old. Unlike a traditional IRA or 401(k), there’s no penalty for withdrawing contributions before 59½, although there is a 10 percent penalty on early withdrawal of account earnings that do not meet certain qualified exceptions.
With a Roth IRA, you’re not required to take RMDs and you can continue making contributions as long as you have eligible earned income. You can save money in both a traditional IRA and a Roth IRA as long as the total amount you contribute doesn’t exceed the annual limits set by the IRS.
Both 401(k)s and IRAs can provide an income source to draw from in retirement, but once those funds are taken out and spent, that money is gone. Annuities, on the other hand, provide insurance against the risk of outliving your money after you retire, and may also provide protection from loss due to market downturns. You may also have the option to place a traditional or Roth IRA in an annuity.
With life expectancy increasing, retirement can now span 20 to 30 years or more, making it more important than ever to plan for long-term financial security. Adding an annuity to a retirement strategy can help fill income gaps and create a stream of guaranteed income throughout retirement.
Here is a breakdown of these retirement savings options that can provide the financial resources necessary to help make your retirement remarkable.
| Option | Contribution Limits | Tax Benefits | Withdrawals | RMDs | Unique Advantage |
| Traditional IRA | $7,000 ($8,000 if 50+) | Tax-deductible contributions | Taxed at withdrawal; 10% penalty if < 59½1 | Yes | Pre-tax growth and flexibility |
| Roth IRA | $7,000 ($8,000 if 50+) if your modified adjusted gross income is within the income limits | No upfront deduction, tax-free withdrawals | Contributions anytime; earnings tax-free after 59½1 & 5 yrs | None | Tax-free income in retirement |
| Annuity | Varies by contract | May grow tax-deferred | Depends on contract | Required on qualified money (pre-tax). Not required on non-qualified money (after tax) | Guaranteed lifetime income |
1May be subject to certain exceptions.
Besides a 401(k), there are several options that can help you save for retirement. If you qualify, you can open a traditional IRA, which offers potential tax breaks on contributions, or a Roth IRA, where your withdrawals in retirement are typically tax-free. An annuity is also a great option and can help protect you from outliving your savings by providing guaranteed income later in life.
The main difference between a traditional IRA and a Roth IRA is when you pay taxes. With a traditional IRA, contributions are made with pre-tax dollars, so when you take withdrawals in retirement, those amounts will be taxed as income in your future applicable tax bracket. Roth IRA contributions are made with after-tax dollars, so since taxes have already been paid, once you reach retirement, qualified withdrawals are tax-free. Another key difference is traditional IRAs require RMDs to begin at age 73 or later, but Roth IRAs have no RMDs during the owner’s lifetime.
Yes, contributing to multiple retirement savings accounts can help you diversify your savings and tax strategies and help ensure you have the income required to cover your retirement needs. While you can have several accounts, the IRS limits the total amount that can be contributed annually across all IRAs, and to your 401(k).
Annuities might appear similar to investments, however, they’re actually insurance contracts that can help protect you against the risk of outliving your money. They can help grow your savings tax-deferred and create a steady and reliable income stream for retirement. Some annuities, like a fixed indexed annuity, can help you pursue growth potential while also providing a level of protection against market risk.
After contributing enough to your 401(k) to get the full employer match, if available, you may want to diversify your retirement savings plan with other options. Determining the right amount depends on your financial goals, risk tolerance, tax strategy and retirement timeline. Discussing your options with your financial professional can help you tailor the right strategy that improves your retirement readiness.
Not sure which retirement planning options are right for you? Make an appointment with your financial professional to discuss your options for a retirement income strategy that fits your needs and goals.
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Although fixed indexed annuities offer principal protection from market downturns, the deduction of applicable charges could exceed any interest credited, resulting in the loss of principal.
Withdrawals and surrender of taxable amounts are subject to ordinary income tax, and except under certain circumstances, will be subject to an IRS penalty if taken prior to age 59½.
Under current tax law, the Internal Revenue Code already provides tax deferral to qualified money, so there is no additional tax benefit obtained by funding a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit.
Any information regarding taxation contained herein is based on our understanding of current tax law, which is subject to change and differing interpretations. This information should not be relied on as tax, legal or financial advice and cannot be used by any taxpayer for the purposes of avoiding penalties under the Internal Revenue Code. We recommend that taxpayers consult with their professional tax and legal advisors for applicability to their personal circumstances.
Guarantees provided by annuities are subject to the financial strength and claims paying ability of the issuing insurance company.
Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.
